When the peer-to-peer electronic currency was launched the better part of a decade ago, bitcoin seemed like more of a thought experiment. Now, with one of the most stunning and fastest rises of any asset price in recorded history, these digital files are buying and selling in the range of sixteen to eighteen thousand dollars per unit.
For some starry-eyed advocates, this isn’t just a lucrative investment, it’s the harbinger of a radical new world that will topple governments and bring peace on Earth. That sort of techno-optimism can be tempting, but many mainstream economic observers see something more mundane and troubling: all of the hallmarks of a speculative financial bubble.
Whether Bitcoin is a bubble depends on why people are buying it
Originally, the only substantive use for bitcoin is the online purchase of illegal, or at least dubiously legal, goods and services. Drugs in particular are one of the few items regularly purchased with bitcoin… but as transaction costs have risen on the original bitcoin network, more and more of these transactions have shifted into “alt-coins,” technologically similar competitors that are cheaper to use.
The current price of bitcoin seems to have very little to do with its actual utility, and is driven mostly by buying and holding in the expectation of turning a profit. Actually using bitcoin as a medium of exchange is increasingly less common, particularly as the strained computer network charges increasingly higher transaction costs.
Cryptocurrency has an understandable appeal to libertarians in particular, many of whom were early adopters and evangelizers of the new form of money. Beyond the reach of any central bank or government monetary policy, and enabling peer-to-peer anonymous transactions without any intermediary or banking institution.
Bitcoin could be a bubble, and still be worth holding long term
So is bitcoin a revolutionary technology, or just a 21st Century tulip-mania? It’s quite likely that the answer is both. While the technology still has long-term implications that could take decades to play out, the current price spike is not sustainable and is likely to experience a sharp correction. It wouldn’t be the first time: bitcoin’s price has spiked and then crashed before.
So don’t trade in all of those Federal Reserve Notes just yet… you’ll still need them for years to come, and they remain the far safer store of value for savings and investments